Shares followed National Oilwell and Transocean higher and shrugged off a Lehman Bros. downgrade of the group to "neutral" from "positive."

The downgrade reflects "valuations that are looking stretched on 2004-05 EPS and cash flow estimates and our continued expectation for moderate growth in worldwide (exploration and production) expenditures," Lehman said.

The brokerage also lowered ratings on Baker Hughes
BHI,
-3.67%,
Smith International
SII,
-6.42%
and Varco International
VRC,
+5.39%
to "underweight" from "equal weight" and on Tidewater
TDW,
+18.22%
to "equal weight" from "overweight."

"Oil service and equipment stocks have increased by an average of over 27 percent since late November, and valuations have risen to above typical midcycle levels," analyst Jim Crandell wrote in a research report. "For the shares to move meaningfully higher from this point, we believe earnings must exceed our projections."

None of the stocks closed lower.

Meanwhile, National Oilwell
NOI
benefited from a Lehman upgrade to "overweight" from "equal weight," with its shares jumping $2.01, or 7.4 percent, to close at a new 52-week high of $28.99.

"We are entering the early stages of a rig ordering cycle that will be driven by international land rigs where National Oilwell is the dominant player," Lehman said. "Valuation should improve as these orders unfold."

And Transocean
RIG,
+50.60%,
which announced before the bell contracts for three deepwater rigs worth as much as $113 million in revenue, saw its stock rise 3.6 percent to close at a new 52-week high of $29.98.

Gauging the sector as a whole, the Philadelphia Oil Service Index
OSX,
+12.85%
was up 0.7 percent to close at 106.61.

In commodities trading on the New York Mercantile Exchange, the March crude contract rose 63 cents to settle at $35.12 a barrel, while March natural gas fell 21.7 cents to settle at $5.319 per million British thermal units. See Futures Movers.

Elsewhere in the sector, the CBOE Oil Index
$OIX
advanced 1 percent to close at 328.86, as Dow component ExxonMobil Corp.
XOM,
+8.10%
closed at the latest in a series of 52-week highs, hitting $42.23.

After the bell Tuesday, El Paso Corp.
EP,
-0.54%
said it would take a $1 billion charge. El Paso shares finished at $8.81, up 24 cents, ahead of the announcement.

And Crosstex Energy
XTEX
rose 3 percent to close at $48.99 after announcing a deal to acquire Louisiana Instrastate Gas and related assets from American Electric Power
AEP,
+1.31%
for $76.2 million. AEP's shares rose 75 cents to close at $34.20.

Xcel Energy
XEL,
+0.35%
said it would propose building a 750 megawatt, rate-based, coal-fired generating unit at its Comanche Generating Station near Pueblo, Colo., at a cost of $1.3 billion. The company, which expects to submit the plan to the Colorado Public Utilities Commission by the end of April, said it could begin producing electricity by late 2009.

Xcel's shares were up 26 cents to close at $17.50.

The Philadelphia Utility Index
UTY,
+1.26%
gained 1.1 percent to close at 314.77.

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